Live-Blogging the House’s Madoff Hearing
February 4, 2009, 2:47 pm
dealbook.blogs.nytimes.com
The Congressional inquiry into the Madoff scandal is back in the House on Wednesday. This time, a star witness who was missing from the two previous Madoff hearings last month has finally emerged.
That witness is Harry Markopolos, an investment manager turned financial fraud investigator, who says he repeatedly warned regulators for years about the disgraced financier Bernard L. Madoff. Now, Mr. Madoff stands accused of running a $50 billion Ponzi scheme. Mr. Markopolos is sharply critical of securities regulators, who he accused of ignoring his warnings.
Mr. Markopolos completed his testimony at the hearing of the House Financial Services subcommittee on capital markets shortly after noon. He was followed by a panel of six regulatory officials.
Three of these officials appeared at the Senate Banking Committee’s hearing last week: Linda Thomsen, the Securities and Exchange Commission’s director of enforcement; Lori A Richards, the S.E.C.’s director of compliance, and Stephen Luparello, the interim chief executive of the Financial Industry Regulatory Authority, or Finra.
They were joined by three other S.E.C. officials: Andrew J. Donohue, director of investment management; Erik Sirri, director of trading and markets, and Andy Vollmer, acting general counsel.
The hearing comes on the same day that the trustee overseeing the liquidation of Mr. Madoff’s investment firm said he had recovered $946 million in cash and securities so far, or about 2 cents on the dollar in the reputed $50 billion Ponzi scheme.
DealBook live-blogged the House hearing, with the most recent posts on top:
2:47 p.m. | The hearing adjourns: Mr. Luparello of Finra gets off easy, having only answered one question. Mr. Kanjorski says the committee is going to inquire about how he can get the S.E.C. officials to speak more specifically about the Madoff case.
2:43 p.m. | Giving no grades: When asked to grade the S.E.C., Ms. Thomsen refuses, but says she wishes the agency had discovered Mr. Madoff’s alleged fraud.
2:35 p.m. | Tips and evidence: Asked if the S.E.C. characterizes Mr. Markopolos’s report as a “tip,” Ms. Thomsen replied that she did consider it a tip and said the more credible a complaint, the more they investigate. “Our job is to turn it into evidence,” she said.
2:30 p.m. | Again, no answer: Representative Joe Donnelly of Indiana asks how long the S.E.C. knew there was a one-person accounting firm involved in Mr. Madoff’s operation. Ms. Thomsen said she can’t answer that question.
2:25 p.m. | Once again, the same answer: Responding to several specific questions about the credibility of Mr. Marcopolos and his report, Ms. Thomsen said she can’t answer because of the ongoing investigation.
2:20 p.m. | Split-strike strategy: Representative Ed Perlmutter of Colorado asks Mr. Donohue if he knows what a split-strike strategy is. Mr. Donohue then explains the strategy, but says he has never used it.
2:08 p.m. | Still no specifics: Representative Carolyn Maloney of New York asks how many times someone has to bring a complaint against a single firm before it is investigated. Ms. Thomsen says the S.E.C. examines every complaint but can’t go into specifics about the Madoff case.
2:06 p.m. | Wedding bells and Madoff: Ms. Richards said she recused herself from the Madoff investigation because a former employee of hers married a relative of Mr. Madoff and she attended the wedding.
2:03 p.m. | Complaint triage: Ms. Thomsen is asked if lower-level staffers are allowed to just dismiss certain tips that come in without moving up the ladder. She replies that says the S.E.C. receives hundreds of thousands of tips and that the challenge is to triage the complaints to decide which ones to go after.
1:54 p.m. | More on the S.E.C.’s expertise: Representative Edward R. Royce asks the S.E.C. whether Mr. Markopolos was right when he said that the commission doesn’t understand complex frauds and securities. Ms. Thomsen admits that the division of enforcement is populated with lawyers because they have to bring cases in court. She also admits that the issue of expertise “is something we do need to address.”
1:51 p.m. | Who is the enemy?: Mr. Ackerman continues blasting the S.E.C. and Mr. Vollmer. “Your contribution to this proceeding is zero,” he says. “We thought the enemy was Mr. Madoff. I think it’s you.”
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1:48 p.m. | An all-out shouting match: Mr. Vollmer and Mr. Ackerman are yelling at each other. Mr. Vollmer is trying to explain why the commission can’t talk specifically about the investigation. Mr. Ackerman isn’t buying it and asks whether the S.E.C. is invoking executive privilege. Mr. Vollmer says he is not.
1:44 p.m. | Can’t give specifics: Ms. Richards responds that she can’t talk specifically about what happened in the Madoff case.
1:40 p.m. | “You’ve told us nothing”: A steaming and yelling Mr. Ackerman blasts the S.E.C. “I am frustrated beyond belief. We are talking to ourselves and you are pretending to be here. You’ve told us nothing. What the heck went on? What went wrong? One guy with a few friends and helpers found this fraud over a decade. You guys couldn’t find your backside with two hands when the lights are on. You have totally failed in your mission.”
1:35 p.m. | Examiners, not lawyers: Ms. Richards said most of the people in her division are examiners, accountants and analysts and not lawyers.
1:30 p.m. | Question of experience: Mr. Garrett asks the panel how much experience employees at the S.E.C. have and if they could address the allegations that Mr. Markopolos made.
1:28 p.m. | No idea: Ms. Thomsen says she doesn’t know how long the investigation is going to take.
1:24 p.m. | Snow storms and the S.E.C.: Mr. Kanjorski asks Ms. Thomsen how long the investigation is going to take, so Congress can start working on legislation. “If there’s a snow storm in Washington, it seems like the S.E.C. can’t help.”
1:22 p.m. | I feel your pain: Ms. Thomsen responds that the S.E.C. “hates fraud” and she understands Congress’s frustration that they can’t provide details of the case because some past actions by regulators could have been criminal.
1:18 p.m. | An “annoyed” congressman: Mr. Kanjorski signals that he doesn’t want to hear that the S.E.C. can’t discuss the ongoing Madoff investigation. He notes that the lack of cooperation by the S.E.C. over the last several weeks is “unacceptable” and he threatens to shut down the agency if they don’t start cooperating. Mr Kanjorski says one of the officials asked to testify said he was exempt, prompting the congressman to call the head of the S.E.C. because he was so “annoyed.” He called the opening statements “oatmeal.”
1:15 p.m. | Recess is over: Mr. Kanjorski resumes the hearing after a House vote.
12:46 p.m. | Short recess: The subcommittee is taking a recess for a vote in the House.
12:42 p.m. | No Ponzi jurisdiction: Mr. Luparello admits “the system failed to protect investors” and says FINRA was powerless to examine Mr. Madoff’s money management operations. The regulator only had jurisdiction over Mr. Madoff’s broker-dealer operation, which didn’t include the alleged Ponzi scheme.
12:38 p.m. | Not just lawyers: Ms. Richards, likely responding to Mr. Markopolos’s charges, says S.E.C. investigations don’t include just lawyers. They include professional examiners, accountants and others. She reiterates that with more than 11,000 registered investment advisers, the S.E.C. can’t regularly examine all of them.
12:31 p.m. | Personal views: Mr. Vollmer and Mr. Sirri outline the duties of their offices within the S.E.C., but don’t go into details of the case against Mr. Madoff. Mr. Vollmer, the S.E.C. general counsel, notes that the testimony of the S.E.C. officials represent their personal views and not necessarily the views of the commission as a whole.
12:20 p.m. | Taking fraud seriously: Mr. Donohue echoes Ms. Thomsen saying that the S.E.C. takes fraud seriously and does its best to detect it before it harms investors. The division of investment management, which Mr. Donohue oversees, is not involved in the investigation of Mr. Madoff.
12:13 p.m. | S.E.C. testimony: The S.E.C.’s Ms. Thomsen begins her opening statement, which appears much like her previous testimony on other Congressional panels. She reiterates that the S.E.C. can’t go into any details about the current investigation into Mr. Madoff or past investigations that involve him.
12:08 p.m. | Change of panel: Mr. Markopolos concludes his testimony.
12:07 p.m. | Looking for first base: Mr. Markopolos takes a final shot at the regulators. “If you flew the entire S.E.C. staff to Fenway Park, they wouldn’t be able to find first base.”
12:01 p.m. | The Russian mob: Representative Gary L. Ackerman of New York asks if there was any threats that Mr. Markopolos received when he was investigating and asked him to explain Mr. Madoff’s connections to the Russian mob. Mr. Markopolos said that the offshore funds he identified often take a large percentage of “dirty money.” If anyone in the Russian mob is listening to the hearing, Mr. Markopolos said he was trying to protect them from harm as well.
11:56 a.m. | “A Red Sox fan”: Mr. Markopolos says that those brokers who invested with Mr. Madoff were “blinded by greed” because their fees for investing with Mr. Madoff were so large that they willfully ignored the red flags. Responding to a question about who should play him in the movie, Mr. Markopolos says it “should be a Red Sox fan.”
11:52 a.m. | “Guard the henhouse”: Mr. Markopolos says small investors that had their pensions and health care funds indirectly invested with Mr. Madoff may be on their own because they can’t trust the S.E.C. to “guard the henhouse.”
11:45 a.m. | “3,500 chickens”: Mr. Markopolos shares some of his credentials. He is a certified financial analyst and a certified fraud examiner, was in Army special operations, managed billions of dollars in derivatives for a mid-sized firm in Boston. He also says that the S.E.C. is staffed with “3,500 chickens and we need to get some foxes in there.”
11:31 a.m. | Ripped off by feeder funds: Ms. Speier asks if Congress should go after the feeder funds such as Fairfield Greenwich and Tremont Group Holdings because “they ripped off the American people.” Mr. Markopolio said the feeder funds should be looked into because they willfully turned a blind eye to the red flags.
11:27 a.m. | “Modern Greek hero”: Representative Jackie Speier calls Mr. Markopolos “a modern Greek hero” and asks why he was so afraid for his life. He responds that the Russian mob and Latin American drug cartels were investors with Mr. Madoff and if he was responsible for wiping out their investors, “I would not be long for this world,” Mr. Markopolos said.
11:20 a.m. | Theory about The Journal: Asked about what happened when Mr. Markopolos went to The Wall Street Journal with his investigation, he said the reporter was ready to write the story, but he believes senior editors respected and feared Mr. Madoff and so never allowed the reporter to pursue the story.
11:18 a.m. | Red flags: Asked again why the feeder funds overlooked all the red flags. “The feeder-funds were preying on the people they were close to,” Mr. Markopolos said. He thinks the losses in Europe will probably be much greater than in the U.S. They were paid so much to look the other way.
11:14 a.m. | Ignoring big cases: Mr. Markopolos says he knows of several investigators who turned over detailed reports and tips to the S.E.C. and they were never followed up on. “They ignore the big cases.”
11:10 a.m. | Madoff parallels: Representative Donald A. Manzullo asks whether there are parallels between Mr. Madoff and the hedge fund scheme run by Mr. Nadel. Mr. Markopolos says that the two are alike, but that the S.E.C. doesn’t have the ability or the willingness to go after these frauds.
10:58 a.m. | Spitzer-Madoff ties: Asked whether he turned his report over to the New York attorney general, Mr. Markopolos said he did, but he feared at the time that then-Attorney General Eliot Spitzer was an investor with Mr. Madoff, which turned out to be true.
10:51 a.m. | Due Diligence: Representative Shelley Moore Capito asks what the feeder funds said when they saw Mr. Markopolos’s analysis. He said the feeder funds, including Fairfield Greenwich Group, would probably be answering those questions in court. But, the short answer is that they did not perform any due diligence on Mr. Madoff’s firm.
10:45 a.m. | Mini-Madoffs: Asked whether there are any “mini-Madoffs” out there, Mr. Markopolos says that there are and that he is planning to turn in a $1 billion Ponzi scheme to the S.E.C. on Thursday. “Hopefully they listen to me this time,” he said.
10:41 a.m. | Charges of corruption: Representative Brad Sherman brings up the issue of Mr. Madoff’s accountants again and why that didn’t raise red flags. Asked why he didn’t take his reports to the NASD, Mr. Markopolos calls the NASD a “corrupt organization” that does everything to protect its members.
10:34 a.m. | An incentive: Mr. Markopolos calls for more incentive pay so S.E.C. investigators have reason to go after the big fish instead of ignoring them.
10:23 a.m. | Will you work for us?:If Mr. Markopolos were offered a job at the S.E.C. overseeing the whistle-blower program, would he take it, asks Representative Michael E. Capuano, a Massachusetts Democrat. Mr. Markopolos says he has outstanding family obligations that prevent him from taking a job with the S.E.C. for two years.
10:20 a.m. | Madoff’s helpers: Asked if Mr. Madoff could have acted alone, Mr. Markopolos responds: “He had a lot of help. A robust information technology business and people taking in money and sending out money.”
10:18 a.m. | ‘Hard evidence’: Representative Peter King, a New York Republican, asks Mr. Markopolos if he had any hard evidence against Mr. Madoff or just red flags. Mr. Markopolos responds that he indeed had hard evidence, including the fact that the volume of outstanding options traded in the United States was much lower than what Mr. Madoff said he was trading.
10:11 a.m. | More feeder funds: Mr. Markopolos says there are 12 more feeder funds that sent money to Mr. Madoff that have not yet been identified, but that he knows about.
10:05 a.m. | Lawyers to blame?: Mr. Kanjorski asks Mr. Markopolos if they should “shoot the lawyers.” Mr. Markopolos responds that the lawyers need to be separated from the actual investigators, who should have financial industry experience. He calls for one super-regulator that includes the S.E.C., an insurance regulator, the Federal Reserve and the Commodity Futures Trading Commission.
9:59 a.m. | Flea bites: Mr. Markopolos says he was warned by officials that the S.E.C.’s Boston and New York regional offices got along about as well as Yankees and Red Sox fans. Because of this rift, he was unable to get the attention of the S.E.C.’s New York office.
The S.E.C., Mr. Markopolos says, doesn’t go after the big cases and sits by while the New York attorney general’s office and other regulators prosecute crimes. The S.E.C. “roars like a mouse and bites like a flea,” he declares.
9:45 a.m. | Markopolos speaks: Mr. Markopolos begins by blasting the S.E.C. “Unfortunately, the S.E.C. staff lacks the financial expertise” and understanding of the complex securities traded in the marketplace to investigate frauds, he says. “A fraud that should have been stopped at $7 billion in 2000 has now grown to $50 billion.”
9:44 a.m. | More opening statements: Representative Scott Garrett of New Jersey, the ranking Republican, chimes in, saying that there aren’t “gaps” in the regulatory system: Mr. Madoff’s firm was regulated. Mr. Garrett says he doesn’t believe a lack of resources or funding is the problem at the S.E.C., but rather a lack of execution of changes that were made years ago.
9:29 a.m. | Opening statements: Representative Paul E. Kanjorski, the Pennsylvania Democrat who heads the subcommittee, kicks off the hearing, saying the “world has changed and the motor is broken beyond repair.” He mentions other Ponzi schemes discovered recently, including an alleged scheme by Arthur Nadel in Florida.
Go to Prepared Testimony from Harry Markopolos »
Go to Prepared Joint Testimony from S.E.C. Officials »
Go to Prepared Testimony from Stephen Luparello »
Go to Hearing Details from the House Financial Services Committee »
Go to Related Madoff Item from DealBook »
Go to Previous Live Blog of Senate Hearing from DealBook »
Go to Previous Live Blog of House Hearing from DealBook »
Go to Related Madoff Item from DealBook »
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